The New Republic

The New Republic

The New Republic

Europe Is Not Waging a "Currency War" Against the U.S.

Sean Gallup/Getty Images

On Thursday, Mario Draghi, the president of the European Central Bank, announced a long-awaited plan to buy the bonds of companies and Eurozone countries to help boost the economy. Stocks inched upwards on the news and the value of the euro fell against the dollar. For some, this is evidence that the ECB is prepared to engage in a “currency war” against the United States—a deliberate attempt to hold down the value of the euro to boost exports at the expense of the U.S. But that’s wrong. While the ECB’s actions will cause the dollar to increase in value and hurt U.S. exports, it isn’t close to a currency war.

The key is that the ECB is taking actions to boost the Eurozone economy. The bond-buying program is supposed to lower interest rates for E.U. countries, although they are already very low, and hopefully spur more investment by European companies. Additionally, as the Washington Post’s Matt O’Brien explains, it will also effectively reduce the interest payments Eurozone countries owe on their debt. The ECB’s overall goal is to convince people that it will move inflation, which is currently -0.2 percent in part due to falling oil prices, back towards its 2 percent target.

As a side effect of the ECB’s bond-buying program, the euro’s value against the dollar will fall, helping E.U. exports and hurting the U.S.’s. That’s exactly what happened after Draghi announced the program. But it’s a side effect. The ECB’s actions aren’t intended to push down the value of its currency. If that were the case, it would be currency manipulation—and that would be a serious problem.

The difference between legitimate monetary policy moves and currency manipulation has not been well understood, even in the U.S. “In Davos, Goldman Sachs President Gary Cohn said this week that the world has been in a currency war since Japanese Prime Minister Shinzo Abe's policies started pushing down the yen's rate two years ago,” Bloomberg View’s Leonid Bershidsky wrote Friday. “After that, Europeans felt the pinch and started devaluing the euro.” As noted, the Europeans aren’t taking a deliberate action to devalue the euro. But the case of Japan is a bit more complicated. Most of Abe’s policies are not intended to push down the value of the yen (even though they can have that effect) but instead to get Japan out of its deflationary trap. Yet, some Japanese policymakers have hinted strongly at manipulating its currency. In 2013, the Treasury Department warned Japan against such actions. So while Abe’s actions do not constitute an act of currency war, there is reason to be wary of them.

Under Cohn’s definition of currency manipulation, the U.S. was a major currency manipulator up until recently. From 2008 to 2014, the Federal Reserve implemented three different bond buying programs, purchasing trillions of dollars of bonds and pushing down the value of the dollar. But as with the ECB and Bank of Japan’s actions, the Fed’s policies were designed to lower long-term interest rates and spur business and residential investment in the United States. Once again, pushing down the value of the dollar was a side effect—and thus, the Fed’s programs didn’t constitute currency manipulation.

It’s important to understand what is and isn’t currency manipulation because there is a growing movement in the United States to crack down upon actual manipulators. Senator Debbie Stabenow is working with a bipartisan group of legislators on a standalone bill to stop currency cheaters. They also want to make sure that any trade deals that President Barack Obama negotiates also crack down on manipulation.

That could be really important because Obama has made two trade deals—one in the Pacific and one in Europe—a focal point of his economic agenda for the final two years of his presidency. If Congress, which must approve the deals, requires Obama to include a clause on currency manipulation, it would be a major boon for the U.S. economy. In fact, many on the left oppose the deals if they don’t include such a clause. Yet, that demand could also blow the deals up.